More Cramer Silliness; PIMCO's Active ETF Game Changer

By Matthew Hougan

Jim Cramer's silliest recommendation of all is that investors should only own five to ten stocks.

"Having fewer than five stocks puts a portfolio at the risk of not being diversified enough and having more than 10 stocks gets tricky to manage diligently," the article says.

I'd love to see a five-stock portfolio that qualifies as diversified in even the vaguest sense. Cramer is not just quaint or a moron; he's a danger to inexperienced investors everywhere. It's all fun and games until somebody loses their retirement.

Meanwhile, the big story in the ETF space right now has got to be PIMCO, which appears to be diving into the ETF space in a major way. I think it's great. When we first learned that PIMCO was entering the ETF space back in late July, it appeared as though they were just dipping their toes in the water, laying plans to launch a few me-too bond index ETFs. But now, as Murray Coleman writes, they're going after actively managed stock, bond, commodity and asset allocation ETFs-and that changes things entirely.

It's about time someone plunged headlong into the actively managed ETF pool, and I'm glad to see PIMCO do it. It has the scope and gravitas to significantly shake up the world of actively managed funds, which desperately needs some shaking up. Let's just hope they keep their new ETFs relatively low-cost and relatively transparent in the process.

I'll also say this: The actively managed commodity funds could be game-changers, assuming they launch. As I've said before, indexing may not be the best strategy in the commodities marketplace. There are noninvestment- related price trends in the commodities market -- trends related to seasonal consumption and hedging patterns, for instance -- which a smart active fund may be able to capitalize on. If the commodities market stays volatile, I think a lot of investors could quickly gravitate to an actively managed commodity futures ETF. Even index investors like me.

Comments

[fatcat:]

Sound like a great way for Gross to get some things off the books and into an ETF...

2008 Sep 07 10:27 AM

[kjangelo:]

Cramer actually has it right. Warren buffet also believes in a small portfolio.

2008 Sep 07 10:53 AM

[icandoitdon:]

this is one of the few things i agree with cramer about. the notion of diversification works only when stocks are broadly rising. otherwise it's a prescription to bleed to death slowly. investors with any sense of timing and/or trends are much better off picking a small number of individual stocks, using loss limits to protect against your own misjudgments.

2008 Sep 07 12:37 PM

[Briggsy:]

Bob Brinker recommends no more than 4 percent in any single company. That means no less than 25 stocks.

2008 Sep 07 01:07 PM

[JohnPirie:]

So someone who advocates narrow ownership, regardless of his success as a fund manager, or the agreement of other extremely successful investors, is a "moron."

Why did I just lose my appetite for this writer?

2008 Sep 07 05:30 PM

[wrylie:]

Cramer advocates 5 - 10 stocks for "average people" who want to manage their money and have a career. It is irresponsible to think that a person who does not watch the market minute to minute with a full time job and a family can actively manage and stay on top of 25+ stocks. It is possible to have a diversified portfolio with 5-10 stocks and the notion of owning 25+ stocks is "moronic". Thats an index --buy an ETF.

2008 Sep 08 08:46 AM

[searcher:]

Cramer is correct for money you have available for significantly at risk investments. This should be money at the margin of your investibles. As a prescription for the entire equity portfolio it is lunacy.

2008 Sep 08 12:34 PM

[fran:]

i won.t debate the issue of #s of stocks. but Cramer too often has said "no retirement funds", please. perhaps that is why program is called " MAD MONEY". that term have any meaning?

i'm also not defending CRAMER. i've found him incorrect, too often.

2008 Sep 08 06:21 PM